Leasing a Bank Guarantee

Leasing a Bank Guarantee

The words “leased” or “leasing” in the term “leasing a bank guarantee” is called Collateral Transfer and is only use to simplify the concept of the transaction. The correct technical term is Collateral Transfer.

The word “leased” is in fact misleading, the correct technical term is collateral transfer. Financial historians suggest that the term “leased” in relation to bank guarantees is derived from commercial leasing contracts that have similarities to a “leased bank guarantee” contract. However, leased, in the context of leased bank guarantee (or leased standby letter of credit), is rooted in todays’ financial jargon and is here to stay.

The two parties enter into a Collateral Transfer Agreement. One party (Provider) and owner of the asset, will transfer the bank guarantee to another party (Beneficiary) for a limited period of time usually one year. The Beneficiary is ordinarily able to extend the Collateral transfer agreement for further time if required.

The ownership of the asset then reverts to the provider on expiry of the bank guarantee. The Beneficiary will pay the Provider a “contract fee” in payment for the use of their asset. On receipt of the bank guarantee, the Beneficiary is free to approach their bank and apply for a line of credit or bank loan, (known as credit guarantee facilities), utilising the bank guarantee as security.

The Beneficiary must ensure all loans and credit lines are repaid before the expiry of the bank guarantee.